KWOK HON SHING AND OTHERS v. HAPPY TEAM (CHINA) LTD

LDPE 145/2015

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

APPLICATION NO LDPE 145 OF 2015

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JUDGMENT
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1.  This is an application for recovery of possession and costs. The applicants alleged the respondent had breached the terms of the tenancy agreement, while the respondent submitted the complaints raised by the applicants were not supported by fact or evidence. The parties also argued over waiver as a matter of law and entitlement to relief against forfeiture.

The Applicant’s Case

2.  The applicants, owner of the premises known as 11^th Floor, Rainbow Factory Building, 149 Wai Yip Street, Kowloon (the “Suit Premises”), filed an application to the tribunal on 5 February 2015 against the respondent for recovery of possession of the Suit Premises and order for mesne profits and costs.

3.  There is a tenancy between the applicants as landlord and the respondent as tenant for a fixed term of 4 years from 1 July 2014 to 30 June 2018 at the monthly rent of $37,440 (“Tenancy Agreement”).

4.  The applicants submitted the respondent had breached the terms of the Tenancy Agreement as follows: -

(1) The respondent altered or permitted or suffered to be altered the electricity meters / installations of the Suit Premises thereby overloading the electricity systems which may render the insurance of the building against loss or damage by fire and/or claims by third parties void or voidable or increase the premium;

(2) The respondent demolished or permitted or suffered to be demolished part of the exterior walls of the Suit Premises and altered or permitted or suffered to be altered the same to windows and glass; and

(3) The respondent used or permitted or suffered to be used the Suit Premises for residential purpose.

5.  The applicants further submitted Katherine Y.W. Or & Co. acting for the applicants had sent a complaint letter to the respondent on 12 November 2014 demanding the respondent to rectify the breaches within 14 days and a further reminder on 30 December 2014 demanding the respondent to reply within 7 days.  Although the applicants had subsequently received a reply letter from the respondent on 5 January 2015, the applicants submitted the respondent had failed to rectify the breaches within a reasonable time and therefore filed an application to the tribunal to forfeit the lease between the parties.

The Respondent’s Case

6.  The respondent filed a Notice of Opposition on 13 February 2015.  The respondent opposed to the application for recovery of possession and asserted as follows: -

(1) The respondent denied that the electricity meters / installations would have overloaded the electricity systems which might render the insurance of the building against loss or damage by fire or claims by third parties void or voidable or increase the premium thereon;

(2) Contrary to the applicants’ allegations, the alleged external walls of the Suit Premises were themselves unauthorized structures, their position was originally windows facing Wai Yip Street and were however blocked up to become the alleged external walls in question, and the respondent had reinstated them as what they originally had been (i.e. windows) pursuant to the approved building plan; and

(3) The respondent had been ignorant of the suspected residential use of part of the Suit Premises, where pursuant to a sub-tenancy agreement must be used for industrial purpose only, by one sub-tenant and after receipt of the applicants’ letter dated 12 November 2014 the said sub-tenant was evicted and moved out in early January 2015 and the applicants were informed of such in a letter dated 2 January 2015.

7.  The respondent submitted even if the respondent had been in breach of the Tenancy Agreement, the alleged breach had been waived by the applicants when the respondent had been paying rents and the applicants had been accepting the same despite the alleged breach.

8.  The respondent further submitted if the applicants are entitled to enforce a right of re-entry or forfeiture the respondent applies for relief under section 58 of the Conveyancing and Property Ordinance (Cap. 219) or the equitable jurisdiction of the court.

The Disputes

9.  In summary, the disputes between the parties at the hearing are as follows: -

(1) Whether the alterations to electricity meters / installations by the respondent have overloaded the electricity system and there was a breach of the Tenancy Agreement;

(2) Whether the alleged external wall was an unauthorized structure and had been reinstated;

(3) Whether the respondent had breached the user clause of the Tenancy Agreement and the breach had been rectified;

(4) If the respondent had been in breach of the Tenancy Agreement, whether the alleged breach had been waived by the applicants; and

(5) If the applicants are entitled to enforce forfeiture, whether the respondent is entitled to relief.

Whether the electricity system has been overloaded and there was a breach of the Tenancy Agreement

10.  The parties had no dispute that there was splitting of electricity meters by the respondent. 

11.  Ms Law, counsel for the applicants, submitted the alterations have overloaded the electricity system and there was a breach of the Tenancy Agreement.  Ms Law considered the respondent’s ground for opposition (i.e. there was no overloading of electricity system) was not supported by any evidence and was bare allegation only.

12.  Mr Chan, counsel for the respondent, also submitted that the ground for application was bare allegation.  Mr Chan further submitted the applicants had not provided any evidence to show that the installation of sub-meters have overloaded or even increased the electricity load of the Suit Premises and there had been no complaint by the insurance company to suggest that any insurance policy was at risk of being void or voidable as a result of installation of sub-meters.

13.  Although Mr Yeung, witness of the respondent, alleged splitting of the electricity meters were done by registered electricians and an electricity technician had told him that the total electricity consumption after sub-division would not exceed the original limits of the original electricity meter, both parties had not called any expert or technician as witness to prove their respective case.

14.  Without any expert evidence, I agree both parties had bare allegations only.  Since the applicants failed to establish there was a breach of the Tenancy Agreement because of the splitting of electricity meters, the applicants’ ground in this regard fails as a matter of fact.

Whether the alleged external wall was an unauthorized structure and had been reinstated

15.  Although the respondent had submitted in the Notice of Opposition that the alleged external wall facing Wai Yip Street was actually unauthorized structures and the respondent had already reinstated them as windows pursuant to the approved building plan, Mr Chan rectified the respondent’s position in his opening submission.  Mr Chan corrected that it was not until the call-over hearing on 10 March 2015 the respondent learnt the exact location of the wall complained by the applicants should actually be the wall facing the side as opposed to Wai Yip Street, and upon learning that an alteration had taken place the respondent had already restored the wall to its original state, and by the end of April 2015 before the hearing on 29 April 2015 there was no breach of the Tenancy Agreement.

16.  Although Mr Yeung alleged at the hearing the said external wall facing the side had been reinstated and produced photographs to show the reinstatement, Ms Law submitted these photographs were unclear and could not prove there was reinstatement. Moreover, Ms Law contended there was no reinstatement at least on 16 April 2015 as revealed by the photographs taken by Ms Kwok, witness of the applicants, on 16 April 2015.  Ms Law also submitted the respondent had not applied for a permit to conduct minor works from the Buildings Department in relation to the alleged reinstatement and there was no record of completed and acknowledged minor works too, and hence there was no proof of reinstatement.

17.  No matter whether the respondent had misunderstood the position of the unauthorized alteration and / or whether the respondent had reinstated the unauthorized alteration before the hearing, the parties had no dispute that there was in fact an unauthorized alteration to part of the external wall as at the date of application.

18.  In the Tenancy Agreement, the respondent agrees “not to cut maim or injure or permit or suffer to be cut maimed or injured any doors, windows, walls……” The applicants found an alteration to the external wall during the lease term and contended the respondent demolished or permitted or suffered to be demolished part of the exterior walls of the Suit Premises and altered or permitted or suffered to be altered the same to windows and glass.

19.  Although Mr Chan submitted the respondent did not know and admitted no liability as to how the alteration occurred, the respondent had decided to reinstate and had also claimed to have reinstated the said external wall. 

20.  Since the unauthorized alteration was found during the lease term, I believe on the balance of probabilities the respondent had altered or had permitted to alter the external wall and breached the Tenancy Agreement.  

21.  Even if the breach was rectified by the respondent before the hearing, I consider the applicants could enforce the right of forfeiture because the respondent had failed to remedy the breach within a reasonable time after the applicants’ written notice of 12 November 2014.   

22.  I consider the written notice of 12 November 2014 had clearly complained about the demolition of external wall and the conversion of it into windows, but the respondent had submitted wrongly in the Notice of Opposition that the position of the alleged external wall was originally windows.  Since the subject complaint was clear, I on the balance of probabilities do not believe the respondent had misunderstood the complaint. Even if the respondent had really misunderstood the complaint and knew about the exact location at the call-over hearing on 10 March 2015 only, I consider this was a unilateral misunderstanding only and the respondent had not dealt with the complaint seriously.

23.  Although Mr Yeung had estimated in his witness statement of 8 April 2015 that reinstatement works would be completed by 15 April 2015, I on the balance of probabilities believe the respondent had not remedied the breach at least until 16 April 2015. However, I on the balance of probabilities believe the respondent had reinstated the unauthorized alteration before the hearing on 29 April 2015.

Whether the respondent had breached the user clause and the breach had been rectified

24.  Despite the various findings of Ms Kwok on residential use of the Suit Premises, the respondent admitted at least a sub-tenant had used part of the Suit Premises (i.e. Room 13) for temporary residential use.  Nevertheless, the respondent submitted before the applicant’s complaint the respondent had no knowledge of the said residential use and had never allowed sub-tenants to use the Suit Premises for residential purpose too.

25.  The respondent contended the respondent had already asked the said sub-tenant to leave promptly and stopped the alleged residential use of the Suit Premises and therefore the breach of the user clause if any had been remedied.

26.  Provided that the respondent has covenanted in the Tenancy Agreement to use the Suit Premises for commercial purposes only and there is no dispute between the parties that at least a sub-tenant had used part of the Suit Premises for residential use, I consider there was a breach of the Tenancy Agreement and ignorance is not a defense.

27.  The parties had disagreement on the other alleged residential use of the Suit Premises.  Other than the inspection on 3 January 2015 and findings of residential use in Room 13 of the Suit Premises, Ms Kwok said she also found other residential use during her inspections on 8 October 2014, 19 October 2014 and 30 November 2014.  The applicants submitted photos taken on 8 October 2014 as evidence of residential use, which show bed and mattress, wardrobe, stove, electricity appliances and etc. at least in Room 5.  These photos also show toothbrush, toothpaste and hanging of towel in a toilet, and hanging of clothes in an adjacent room.  The applicants also submitted a meeting minutes of Incorporated Owners of Rainbow Factory Building dated 18 October 2014, which stated the Suit Premises was suspected for residential use against the permitted use in the occupation permit of the building.

28.  Mr Chan submitted the applicants’ evidence, as per the inspections of Ms Kwok on 8 October 2014 and 30 November 2014, is not the direct evidence of residential use. However, I on the balance of probabilities believe there was residential use, in addition to that on 3 January 2015, at least on 8 October 2014.  I consider the photos taken on 8 October 2014 shows residential use in parts of the Suit Premises.  In any event, although the respondent said the respondent had already evicted a sub-tenant in early January 2015 and denied all the breaches other than that in Room 13, Mr Yeung could just confirm at the hearing there was no more suspected sub-letting for residential use since 14 February 2015 only.  I on the balance of probabilities believe there were various breaches for residential use at least until 14 February 2015.

29.  On the other hand, although Ms Law submitted (1) the whole design and renovation of the Suit Premises was to sub-let it out for more than commercial and industrial purposes; (2) the respondent likely had the intention to sub-let it for domestic purposes; and (3) the respondent had been trying to hide some facts from the court, Ms Kwok could just confirm in her witness statement that she had seen residential use lastly on 3 January 2015, before the application filed on 5 February 2015.

30.  Without any other evidence contrary to the evidence of Mr Yeung that there was no more suspected sub-letting for residential use since 14 February 2015, I on the balance of probabilities believe that the respondent had already remedied the breach for residential use.

Whether the alleged breach had been waived by the applicants

31.  The parties did not dispute, after both learning of the breach if any by the applicants and filing of the application in February 2015, the respondent had been making payment of rent monthly and the applicant continued to receive the monthly payment and issued receipt for each payment until April 2015.

32.  Mr Chan contended, even if there was a breach of the Tenancy Agreement as a matter of fact, the applicants’ continual acceptance of rent after learning of the breach constitutes a waiver of the breach as a matter of law.  Mr Chan also contended the non-waiver clause in the Tenancy Agreement is inoperative where the waiver is constituted by receipt of rent. 

Non-waiver clause in the Tenancy Agreement

33.  The applicants relied on Clause 4(c) of the Tenancy Agreement, which states “Acceptance of rent by the Landlord shall not be deemed to operate as a waiver by the Landlord ……”  On the other hand, although it was held in the case Po On Auto Accessory Company Ltd v Grand Faith Holdings Ltd HCA 180/2010, 20 August 2010, that the effectiveness of non-waiver provision has been doubted, Ms Law contended this was wrong and the quotation therein from Hong Kong Tenancy Law was not supported by cases.

34.  Although Ms Law further relied on §57 of State Securities plc v Initial Industry Ltd 2004 EWHC 3482 (Ch) and concluded that there is no sound basis to say that such non-waiver clauses are ineffective as a matter of law, she had no submission in support of the viability of such non-waiver clauses.

35.  With respect, I disagree with Ms Law and agree to the quotation from Hong Kong Tenancy Law as follows: -

“Written leases commonly contain a stipulation that acceptance of rent shall not be deemed a waiver of the landlord’s right to sue. It is doubtful if such clauses have much effect, since a waiver of its nature is based on events which occur after the lease has been entered into and the essence of which is an indication by the landlord that he has abandoned his rights and treats the lease as continuing. The idea, in short, is that he cannot both have his cake and eat it. To give effect to a “no wavier” clause in the lease would not only contradict the essence of waiver but would also use a term of the lease to save the very thing undermined by the waiver – another term of the lease. Furthermore, if the landlord’s act constitutes a waiver of the breach, it may also, presumable, constitute a waiver of his reliance on the “no waiver” clause.”

36.  I consider if there was really a waiver in this case, the applicants could not rely on the non-waiver clause in the Tenancy Agreement because there would be both a waiver of the breach and presumably a waiver of the reliance on the non-waiver clause.

Waiver for continuing breach and once-and-for-all breach

37.  The parties had not argued over some legal principles of waiver in Hill and Redman’s Law of Landlord and Tenant as follows: -

(1) A[4847] - A breach of a covenant restricting the user of the premises is a continuing breach and a breach of a covenant against making alterations is a once-and-for-all breach.

(2) A[4846] - When the right to forfeit for a once-and-for-all breach is lost by waiver, it is lost for the remainder of the existence of the lease.

38.  However, the parties disagreed on the extent of waiver for a continuing breach.  Ms Law submitted even if there was a waiver for the breach of user clause, being a continuing breach, by acceptance of rent, what was waived was the right to forfeit not the continuing breach itself and in the circumstances the landlord could still forfeit the lease the day after the rent had been accepted and did not have to wait until the end of the rental period in respect of which rent had been taken.  Whereas, Mr Chan submitted it is trite principle of Hong Kong law (as opposed to English law) that acceptance of rent after knowledge of breach constitutes waiver for both single and continuing breach.

39.  Mr Chan relied on mainly two local cases Chinachem Investment Co Ltd v Chung Wah Weaving and Dyeing Factory Ltd CACV 40/1977 and Hongkong Bank Trustee Ltd v Chan Chi Wah CACV 107/1982 to support his arguments.  Mr Chan submitted, in the case Chinachem, the Court of Appeal after examining the facts held that acceptance of rent was clearly a waiver of the past breach and an acquiescence of the continued breach such that the restrictive covenant was waived for the duration of the tenancy, and in the case Hongkong Bank Trustee, if the landlord knew the breach would be continuing at the time of waiver, the waiver would be for such period as the landlord knew they would continue. 

40.  With respect, I do not agree with Mr Chan that there is such distinction between English law and Hong Kong law on waiver.  While the case Chinachem had decided mainly waiver of covenant only, not waiver of continuing breach, the case Hongkong Bank Trustee had actually made reference to the English case Segal Securities Ltd v Thoseby [1963] 1 Q.B. 887.

41.  Unless there is waiver of covenant, I agree with Ms Law where waiver has been caused by an acceptance of rent, the landlord can forfeit the lease the day after the rent has been accepted, provided that the breach is continuing. In the case Chinachem, the Court of Appeal accepted there was waiver of continuing breach only because in this particular case there was such acquiescence as amounted to waiver of the covenant itself for the duration of the tenancy.  In the subject case, there is no evidence that the applicants had acquiesced in the continued breach of the user clause in the Tenancy Agreement.

42.  The Court of Appeal held in the case Hongkong Bank Trustee where rent has been accepted after knowledge of the breach, such acceptance does not operate as a waiver of future breaches except in relation to the period the landlord knew they would continue.  Mr Chan submitted the acceptance of rent by the applicants would constitute a waiver of the continuing breach which the applicants knew the breach would continue.  Mr Chan further submitted that the applicants should have known, at least as per Ms Kwok’s inspection on 3 January 2015, the residential occupant of Room 13 would stay for 3 months.  In accordance with a photo of the receipt submitted by the applicants, the sub-tenancy of Room 13 for 3 months would expire on 28 March 2015.

43.  Ms Law contended the applicants did not know when the continuing breach might end in the present case and it is unfair for the respondent to argue that since Ms Kwok learnt the sub-tenancy of Room 13 would last for 3 months and therefore the applicants must be taken to have known the breach of user clause would end after 3 months.  Ms Law submitted there is no evidence in this regard and such inference is unjustified.  

44.  I consider the applicants should have known the duration of the sub-tenancy of Room 13 but the applicants might not know how long the breach would continue.  Knowledge of the lease term is not equivalent to knowledge of the duration of the breach.  Unless the applicants knew the breach would continue for a certainty, I am of the view that the applicants had not waived the future breach for a period.

45.  In any event, there were other breaches of user clause found by the applicants and the respondent could just confirm at the hearing there was no more suspected sub-letting for residential use since 14 February 2015 only, after the date of application on 5 February 2015.  Even if the applicants knew the breach in Room 13 would continue for 3 months, there is no evidence that the applicants knew the duration of other breaches of the user clause.  Even if the applicants had waived the breach in Room 13, the applicants had not waived the continuing breaches in other parts of the Suit Premises. 

Whether acceptance of rent after application for forfeiture is a waiver

46.  Mr Chan submitted that on the facts of the present case the receipt for rent after forfeiture proceedings constituted a waiver.  However, I agree with Ms Law that an application for forfeiture is an unequivocal and final election to determine the lease and there could be no waiver after the bringing of proceedings for forfeiture, whether by acceptance of rent or otherwise.

47.  I consider an equivocal claim for possession operates as a final election to determine the lease.  Accordingly, if the landlord brings proceedings for forfeiture, and afterwards accepts rent, there is no waiver.  See Woodfall on Landlord and Tenant, Volume 1, para 17.100. This principle was held by the High Court in the case Mixwell Properties Limited v Lee Wan Yuen HCA 12483 of 1996, 20 February 1997.

Any waiver?

48.  I consider the breach of the covenant against making alteration by the respondent was a once-and-for-all breach and this had been waived when the applicants accepted rent after the applicants knew the breach and before the application for forfeiture, whilst the applicants could not relied on the non-waiver clause in the Tenancy Agreement because there would be both a waiver of the breach and presumably a waiver of the reliance on the non-waiver clause.

49.  However, the breach of the user clause being a continuing breach had not been waived in the present case.  I consider the applicants could still forfeit the lease the day after the rent had been accepted and there was no wavier after the application for forfeiture.  I am also of the view that when the applicants accepted rent the applicants did not know how long the breach, or precisely each of the breaches, would continue and therefore there was no waiver.

Whether the respondent is entitled to relief from forfeiture

50.  Provided that I find the respondent was in breach of the Tenancy Agreement as a matter of fact (i.e. breaches of the alteration and user clauses) and the breach of the user clause had not been waived, the applicants are entitled to forfeit the lease.

51.  Nevertheless, since I also find the breaches have been rectified before the hearing and the applicants had accepted rent on 2 February 2015 and commenced proceedings shortly thereafter on 5 February 2015, I consider the appropriate course of action is to grant the respondent relief from forfeiture under section 58 of the Conveyancing and Property Ordinance.

Release of Interim Payments

52.  The respondent has paid into the tribunal interim payments in the total sum of $187,200 and this can be released to the applicants as rent from 1 May 2015 to 30 September 2015.

Costs

53.  Although the applicants have failed in two of the three grounds of the application and a relief from forfeiture is finally granted to the respondent, the applicants have anyhow succeeded in this action with entitlement to forfeit the lease.  Provided that most of the time in these proceedings was spent on arguing whether there was breach of the user clause and waiver of continuing breach that the applicants have succeeded, I consider the respondent should pay the applicants part of the costs.

54.  All in all, I think it is fair to make a costs order nisi that the respondent do pay the applicants 60% costs of this action, to be taxed if not agreed on the District Court scale, with certificate for counsel.  If there is no application to vary the order nisi within 14 days hereof, the order shall become absolute.